General Dynamics CEO sets sights on further growth, acquisitions

WASHINGTON ― The defense budget is shrinking, but General Dynamics Corp. still sees growing demand for its combat vehicles and warships, coupled with unprecedented opportunities to sell its popular Gulfstream business jets in China and other emerging markets.

Chief Executive Jay Johnson, a former F-14 fighter pilot and chief of naval operations, shies away from phrases like “off the charts,” but his steep hand gesture depicts a bright future for the commercial aerospace sector, and he’s not too worried about the defense outlook, at least for now.

In fact, tighter U.S. defense budgets will generate good acquisition opportunities for General Dynamics in coming years, Johnson told Reuters in a rare interview at the company’s headquarters in Falls Church, Va.

“We don’t have time to wring our hands. For us it’s all about performing for the customer and delivering to the shareholder,” says Johnson, who said the company remained committed to paying strong dividends, but would also keep enough cash on hand to take advantage of possible acquisitions.

The company’s strategy seems to be paying off, with Warren Buffett’s Berkshire Hathaway recently making a significant investment in GD after selling its stake 10 years ago.

“It’s the Warren Buffett seal of approval, which I think counts for a lot,” he said. Buffett has not disclosed the size of his holding, he said.

U.S. defense companies are scrambling to cut costs and find alternate revenue sources as they brace for a big decline in spending after a decade of double digit growth.

Many analysts consider GD the best-positioned company in the sector, given the mix of its weapons expertise and red-hot prospects for its Gulfstream business, which already has 200 orders for the new GS650 jet entering service next year.

Analysts expect General Dynamics, one of the five largest U.S. arms makers, to boost revenues by about $1 billion to over $33 billion in 2011, with sales growing modestly over the next two years. Revenues will be buoyed by an order backlog of over $58 billion and rising international sales.”We still will generate considerable earnings and cash in the defense space,” said Johnson, noting GD would benefit from continued demand for upgrades to tanks and other ground combat vehicles, even as U.S. forces withdrew from Iraq.

Demand from military commanders would ensure continued shipbuilding sales “as far as the eye can see,” said Johnson, who met with top Navy officials in Hawaii last month on the sideline of the Asia-Pacific Economic Cooperation meeting.

GD is one of two builders of Virginia-class nuclear-powered submarines, and recently won praise from Defense Secretary Leon Panetta for building the latest submarine, the USS Mississippi for $50 million below target and a year ahead of schedule.

The company is also “very excited” about the prospects for its commercial aerospace division, Johnson said, adding that demand from emerging markets was fueling growth “in a way that I don’t think we’ve ever seen before.”

In time, the division could generate about 30 percent of revenues, up from 20 percent now, Johnson said.

Analysts say GD’s earnings potential is excellent, given growing demand from China and other emerging markets for its Gulfstream jets, which Morgan Stanley analyst Heidi Wood calls “one of the world’s sexiest and most respected brands.”

GD has forecast that operating earnings from commercial aerospace could grow to over 35 to 40 percent of company-wide operating earnings in the next five years, from 20 percent now. Wood says they could reach as high as 50 percent.